ECON 102 Chapter Notes - Chapter 22: Unemployment Benefits

1. Assume an economy with a Household Sector and a Business Sector. Household spending is given by C= 400 + 0.9Qd. Since there is no public sector, Qd = Q. Business sector spending is given as I = 1300. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Consumption Spending (C) and Household Savings.

2. Now add a Foreign Sector where Exports are X = 1000 and Imports are Im = 500 + 0.1Q. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Consumption Spending (C) and Household Savings.

3. Now add a public sector where Government Purchases are G = 2000, Transfer Payments are Tr = 2500 and Taxes are Tx = 500 + (1/3)Q. With the public sector Disposable Income is Qd = Q - Tx + Tr. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Taxes, Disposable Income, Consumption Spending (C), Household Savings and the Deficit.

Please explain what each equation represents in the answer.

Which of the following statements is not correct?

Select one:

a. An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.

b. Government spending is part of fiscal policy.

c. A decline in government spending brings about a contraction in the economy.

d. Government spending is a means to close a recessionary gap.

e. An increase in government spending shifts the AD curve downward by a fraction of the rise in government spending.

Which of the following was not a cause of the U.S. budget deficits in the 1980s?

Select one:

a. Recessions in the early 1980s

b. A substantial increase in government spending

c. Expansion of existing government programs

d. A substantial decrease in tax rates

e. A relatively constant level of taxation

Which of the following does not qualify as an automatic stabilizer?

Select one:

a. Proportional income taxes

b. Food stamps

c. Welfare payments

d. Progressive income taxes

e. Unemployment compensation

Income taxes affect aggregate demand

Select one:

a. indirectly by changing consumption.

b. indirectly by changing investment spending.

c. indirectly by changing net exports.

d. directly by changing disposable income.

e. directly through government spending.

Which of the following constitutes a direct tax?

Select one:

a. Personal income taxes

b. Sales taxes

c. Excise taxes

d. Trade tariffs

e. Value-added taxes

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.